Which one among the following best describes Ricardian Equivalence ........

Indian Economic System(CSC) Introduction

Which one among the following best describes Ricardian Equivalence?

It is the view that consumers are forward-looking and will base their spending not only on their current income but also on their expected future income, and that they will understand that borrowing today means higher taxes in the future.

It is the view that the government should borrow more money to finance its spending, as this will stimulate the economy.

It is the view that the government should reduce its spending in order to reduce the deficit.

It states that reduction in corporate tax rate at a certain level can increase the overall tax collected.

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Explanation:

The Ricardian equivalence hypothesis states that consumers are forward-looking and will base their spending not only on their current income but also on their expected future income. This means that if the government borrows money to finance its spending today, consumers will anticipate that they will have to pay higher taxes in the future to repay the debt. As a result, they will save more money now in order to reduce their tax burden in the future. This means that the impact of government borrowing on the economy is the same as the impact of increasing taxes, even if the government does not actually increase taxes.